When interest rates rise, existing bond prices decline. This inverse price-yield relationship exists because bonds have a fixed nominal yield and the price is based on how attractive or not interest rates are compared to that fixed rate.
If interest rates increase, new bonds will come out at a higher rate - thus the existing bond is now les attractive and will trade at a lower price. If bond yields decrease, existing fixed income investment will increase as those will become more attractive.
Long term bond prices are more volatile than short term bond prices. The lower coupon securities of the same maturity will be more volatile as well.
It is best to invest in long term bonds when interest rates are high or peaked and are expected to drop. This will increase the price.
Investment Articles
If interest rates increase, new bonds will come out at a higher rate - thus the existing bond is now les attractive and will trade at a lower price. If bond yields decrease, existing fixed income investment will increase as those will become more attractive.
Long term bond prices are more volatile than short term bond prices. The lower coupon securities of the same maturity will be more volatile as well.
It is best to invest in long term bonds when interest rates are high or peaked and are expected to drop. This will increase the price.
Investment Articles
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